Online Forex Trading: The Importance of Interest rates

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Interest rates are the single most influential fundamental in the forex market. The changing of interest rates often causes wild swings of hundreds of pips across the pairs. The interest rates that are of special concern to forex traders are those set by central banks.

Central banks are the governing bodies in each country or region that determine short-term interest rates. Most of the major central banks operate in similar fashions, looking at similar economic indicators and using similar methodologies to set interest rates.

The eight central banks that you need to follow are:

FOMC - The Federal Reserve (USD) ECB - European Central Bank (EUR) BOE - Bank of England (GBP) BOJ - Bank of Japan (JPY) BOC - Bank of Canada (CAD) SNB - Swiss National Bank (CHF) RBA - Reserve Bank of Australia (AUD) RBNZ - Reserve Bank of New Zealand (NZD)

Each of these central banks meets about once a month to determine short-term interest rates for their countries, or region in the case of the European Central Bank. The direction of interest rates is the single biggest influence on a currency. Unexpected changes in interest rates can have a huge and immediate impact on a currency.

When considering the impact of interest rates on currencies the formula is quite simple:

High or rising interest rates are generally positive for the domestic currency; low or falling interest rates are generally negative for the domestic currency.

The complex part of interest rates is in understanding what a central bank is thinking and what they're going to do, if anything, with interest rates. The aforementioned central banks exist to primarily minimize inflation, but also promote economic growth. It's a fine line they walk. Fortunately for forex traders, central bankers often make mistakes in estimating inflation and forecasting growth. These mistakes lead to huge swings in currency pairs.

Fighting inflation is the first responsibility of central banks. Knowing the amount of inflation in a country can give forex traders a good idea about what to expect from a central bank in terms of interest rate movements. When inflation is increasing, central banks tend to raise interest rates, which support a stronger domestic currency. Alternatively, when inflation is decreasing and an economy is slowing, central banks tend to lower interest rates, which put pressure on the domestic currency.

The good news for forex traders is that there is a handful of inflation indicators released regularly in each country. Although the names of the indicators may vary slightly from country to country, the numbers from each indicator are very similar. In short, you can find consistent data across the countries whose currencies you trade.

Visit http://www.fxpnf.com to learn more about how to take advantage of changing interest rates in the forex market. You can learn to spot key changes in interest rates and profit from them by using the Forex Point and Figure System.